Potholes on the digital payment superhighway

ECONOMY/ GOVERNANCE/ S&T

Topic: General Studies 2,3:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
• Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Potholes on the digital payment superhighway

Context: Digital payments have found strong ground, especially in India, increasingly relegating all other modes of payments to the background.

Payment Ecosystem steered by the RBI

1. RTGS and Large Value Payments

• Initiative of RBI: A major thrust toward large value payments was effected through the Real Time Gross Settlement System, or RTGS, launched by the RBI in March 2004.
• Impacted Capital Markets: The large value payments on stock trading, government bond trading and other customer payments were covered under the RTGS, providing finality of settlement in short time period
• Reduced Risks: The payment system greatly reduced the risks such as the Harshad Mehta scam and improved the confidence in financial system thus attracting more participation (domestic and foreign players)

2. NEFT and Bulk Retail Payments

• The RBI introduced National Electronic Funds Transfer, or NEFT, and bulk debits and credits to support retail payments around the same time. 
• Now, NEFT is available round the clock and RTGS will follow from December 2020 — only a few countries have achieved this.

3. Setting up of NPCI as Umbrella Organisation for retail payments

• National Payments Corporation of India (NPCI) was set up by 10 lead banks at the instance of the RBI in 2009.
• Learning from other successful models: In 2004, a four-member team of RBI visited the Riksbank, the central bank of Sweden and learnt that a not-for-profit organisation owned by eight Swedish banks was set up in Sweden for providing retail payment and related services. The model appeared as an attractive proposition as payments is basically a public good. 
• Thus the idea of the NPCI as a not-for-profit company has a link from Sweden’s financial system
• The corporation was fully supported by the RBI and the government as an extended arm of the sovereign
• The setting up of such an umbrella organisation to build a super highway for digital payments led to humongous success in the coming years

Challenge Ahead for NPCI- Demand to convert into for-profit Company

• There is a demand from some quarters that the NPCI should be converted into a for-profit company to withstand competition. 
• But this will be a retrograde step with huge potential for loss of consumer surplus along with other strategic implications.
• Instead, like the RBI providing free use of the RTGS and other products, the strategy should be to assist the NPCI financially, either by the RBI or the government, to provide retail payment services at reduced price (in certain priority areas). 

Issue of Merchant Discount Rate(MDR)

• MDR is charged to merchants for processing debit and credit card transactions. To accept debit and credit cards, merchants must set up this service and agree to the rate. 
• The amount that the merchant pays for every transaction gets distributed among three stakeholders–the bank that enables the transaction, vendor that installs the point of sale (PoS) machine and the card network provider such as Visa, MasterCard, RuPay.
• In Budget 2020-21, the government prescribed zero MDR for RuPay and UPI, both NPCI products, to popularise digital payments benefiting both customers and merchants.
• For reasons unknown, the government left out other providers of digital payment products from this MDR prescription, which is unjustified and had adverse effects. 
• Taking advantage of this dichotomy, many issuing banks switched to mainly Visa and Master cards for monetary gains. 
• As customers were induced by such supplier banks, it created a kind of indirect market segmentation and cartel formation, though there is hardly any quality difference in payment products.

Way Ahead

• The ideal pricing for digital payments products should be based on an analysis of producer surplus, consumer surplus (i.e. gain or loss of utility due to pricing) and social welfare for which we need cost-volume-price data.
• Digital payment system is like a national superhighway, for which the government has a crucial role to play in protecting consumers against exploitation.
• A free market should not deny a fair amount of return to payment service providers including Fin-Tech companies. But this should not be at the cost of huge loss of consumer surplus.